- Olympic Medals, Nobel Prizes & Dirt For Sale
- Financial Planning Corner: Medicare Annual Election
- Educational Savings Plans
- Investment Spotlight
By: Paul Sutherland, CFP®
I heard an Olympian speak yesterday at Rotary. She told her life story of persistence through an array of challenges, including a broken back. Her talk got me thinking about the little five-year-old future Olympians I coach for soccer and how managing these kiddos invites some of the same choices I face managing money for a living.
My soccer team is, of course, a mishmash of youngsters. Some are there only because mom and dad want to pull them from their video games to straighten their eyes out for a few minutes. Others, like the one whose parent told me laces up his cleats two hours before each practice, are the ones doing the pulling. Some play our twenty-eight minute games simply for the hope of an “attaboy,” while others are pretty much oblivious to the yells of their parents, their coaches, the score, or even their teammates and just love to run around (remember, these are five-year-olds).
Directing such a motley crew with the hope of winning a few games is no easy task. The other day I found myself wondering how our latest round of Nobel Prize in Economics winners would approach the challenge of creating a lineup for my team. I tend to take a multi-disciplinary approach to life, and these are supposed to be the smartest of the smart. Surely they might provide some nuggets of wisdom that I could apply on the soccer field.
Go For Mediocrity
Eugene Fama was one of this year’s Nobel winners and is probably most known for his “efficient markets” theories. According to these theories, asset price movements are not predictable because prices fully reflect all available information. Bubbles don’t exist, as prices are always rational.
Based on his theories about investing, Fama would probably advise me to simply acknowledge that superior performance (ie, a winning record) is not repeatable. My best bet, therefore, would be to take the route that required the least amount of effort and settle for mediocre results over time. He’d probably even provide me some leftover darts from blindfolded monkey stock-picking experiments and encourage me to put my list of players on the wall and let the darts fly to choose who will play offense, defense, and goalie.
It’s Rational to Exploit Irrational Behavior
Robert Shiller shared this year’s prize with Fama and a third economist, Lars Peter Hansen. Shiller is one of Fama’s most influential critics and authored an extensive body of work about the irrational and inefficient behavior that has influenced asset prices and markets for centuries. He is well known for “calling” the bubbles in both stocks during the late 90’s and real estate less than ten years later. Shiller would likely say, “Paul, are you telling me that the fearless kid who bodysurfs the Banzai Pipeline would be no better a choice for goalkeeper than the one who spends most of his practices counting clouds? Of course not! And how about paying some attention to the herding tendencies of your opponents? Exploit these for heaven’s sake!”
As clients and followers of FIM Group know, I would be much more inclined to bring on Shiller as an assistant coach than Fama. I have found over decades of professional investing that a balanced mix of continual learning, careful analysis, and disciplined decisions can indeed make for results that are like the children in Garrison Keillor’s Lake Wobegon: all above-average. So just as I might find a few less minutes for a player who comes to the game whining about the warm-up jog around the field, I will also leave stocks and bonds with inferior characteristics (like high valuations or poor business outlooks) for others to hold in their portfolios (Fama’s fan club of index-investors can have at ‘em). Likewise, the fearless bodysurfer will likely get the nod to shield our goal from opposing strikers just as value-priced, fundamentaly strong holdings will find their way into FIM Group managed accounts.
Dirt for Sale
Speaking of value-priced, fundamentally strong investments, our team has built relatively significant exposure to a select group of real estate-related stocks this year. Your FIM Group managed portfolio owns a basket of REITs (Real Estate Investment Trusts) that offer both solid income and ample growth potential. These companies invest directly in real estate and by mandate must distribute about 80% to 90% of earnings as dividend distributions. They own office buildings, retail properties, apartments, malls, hospitals, and warehouses in Singapore, Indonesia, New York City, Sydney and just about any place you can name in between (although nothing yet in Russia or the North Pole). Also in FIM Group managed portfolios are companies that sell real estate like Brookfield Real Estate Services and hybrid property developers/managers like Capitaland. Brookfield has one of the leading realtor networks in Canada and pays a steady cash dividend yield of approximately 8%, while Capitaland is a highly successful developer and owner/manager of mixed-use properties in Singapore and other parts of Asia that trades at a significant discount to net asset value. This basket of real estate-related companies averages over a 6% yield with income streams that should grow over time. The table on page 3 provides a snapshot of our primary real estate holdings.
One REIT that we recently purchased for appropriate accounts is American Realty Capital Properties (ARCP). ARCP raised their dividend twice this year and just announced another upcoming dividend hike based on the acquisition, under favorable terms, of competitor Cole Real Estate Investments (also owned in appropriate FIM Group managed accounts). ARCP traded for over $18.00 in May of this year. Then as the Fed started chatting about “tapering” its Quantitative Easing policy and Washington was readying another layer of paint for the debt ceiling, ARCP shares began a tumble to twelve bucks and change by September. Amid the mini-panic, we averaged in for under $12.50/share and anticipate that as the Cole acquisition completes early next year, we will be yielding over 7% on our average cost with plenty of potential for dividend growth in the years ahead.
Price Matters, Value Matters, and Values Matter
Selecting investments like ARCP one-at-a-time when they trade below our assessed “intrinsic value” is what we do day in and day out. We take a rational look at the fundamental value of our current and prospective investments, and we look for opportunities to take advantage of irrational investor behavior that moves market prices around this fundamental value. Shiller would likely appreciate our view that a boring old REIT like ARCP losing a third of its value in four short months, not because its fundamental cash flow generation outlook diminished, but because of investor fear that the Fed might slow down its purchases of Treasury bonds, might indicate the presence of some irrational sellers. Fama, and his mediocrity-seeking index investing disciples, would probably just scoff.
ARCP, like any publicly traded investment, will see its market price gravitate around its fundamental value over time. This “price path,” will at times be anything but smooth, which is the simultaneous curse and blessing of publicly traded securities (a curse for the heartburn it can cause, a blessing because of the opportunities afforded to buy at deep discounts). The mood and influence of a given group of market participants at any point in time, whether high frequency traders, closet-indexing mutual fund managers, or Jim Cramer-watching, do-it-yourselfers, will create price swings around fundamental value that allow savvy investors to make a lot of money buying when prices are favorable and selling when they are inflated. As we have said many times, “price matters, value matters and values matter” – so buying at the right price is important but also buying the right investment matters too.
There are studies about prices being “sticky,” which attempt to explain why ARCP did not immediately go back up to $18.00 when the Fed effectively said “just kidding” on the QE taper. Maybe a future Nobel Prize will be won by a former soccer kid who was dragged to practice that just wanted to stay home and read finance books. His theory might hone in on why investors irrationally think “prices’ reflect value all the time rather than just some of the time. Maybe it will be one of my kids, and I will say “I knew he was a ‘weird smart’ kid when I saw him counting the panels on the soccer ball.”
By: FIM Staff
The Medicare Annual Election Period, otherwise known as AEP, has begun and will last until December 7, as most people are aware. However, what AEP actually is still eludes many. AEP is a time period for change in the Medicare Advantage and Prescription Drug Plan world. During this period of time, Medicare Advantage plan holders can switch out of their plan into another Advantage or back into original Medicare. This is also the time to switch from a supplemental plan to an Advantage. Drug plans can be changed during this time period as well. What most people don’t know is that you can change traditional Medigap plans all year long, not just during AEP.
Keep these facts in mind when considering your Medicare coverage:
It is estimated that 4 out of every 5 seniors are overpaying for their coverage, usually due to lack of Medicare knowledge and guidance. Reviewing your supplement plan could save you hundreds of dollars each year.
Medigap coverage is standardized by the government, which means that every plan (F, G, N, etc.) offers the same benefits. The only difference between carriers is the cost.
It is beneficial to review your drug plan every year. Your medications may have changed, your existing plan may be changing and there could be new plans available that could save you hundreds of dollars per year.
Navigating this confusing time can be difficult to do alone. Fortunately, we have added Medicare to our list of expertise and can connect you to the solutions you seek. Please contact your FIM Group advisor to learn more.
By: Jeff Lokken, CFP®
The current cost for a college education ranges from $20,000 to $60,000 annually, and these costs are rising every year. Parents with young children are faced with many rewards and challenges, one of which may be saving for the high cost of college education. Fortunately, there are two tax-favored options that might be beneficial: a Qualified Tuition Program and a Coverdell Education Savings Account. In addition, you might also want to invest in U.S. Savings Bonds that allow you to exclude the interest income in the year you pay the higher education expenses. Each of these options has its benefits and limitations, but the sooner you choose to make the investment in your child’s future, the greater the tax savings will be.
Qualified Tuition Program (QTP)
A Qualified Tuition Program (also known as a 529 plan for the section of the Tax Code that governs them) may be a state plan or a private plan. A state plan is a program established and maintained by a state that allows taxpayers to either prepay or contribute to an account for paying a student’s qualified higher education expenses. Similarly, private plans provided by colleges and groups of colleges allow taxpayers to prepay a student’s qualified education expenses. These 529 plans have, in recent years, become a popular way for parents and other family members to save for a child’s college education. Though contributions to 529 plans are not deductible for Federal tax purposes, some states like Wisconsin ($3,000 per year per beneficiary) allow a deduction against income for state taxes. Additionally, contribution limits are very high, making 529 plans an excellent way for grandparents to transfer funds to their grandchildren.
529 plan distributions are tax-free as long as they are used to pay qualified higher education expenses for a designated beneficiary. Qualified expenses include tuition, required fees, books and supplies. And for someone who is at least a half-time student, room and board also qualify as higher education expenses.
Coverdell Education Savings Accounts
Coverdell Education Savings Accounts are custodial accounts similar to IRAs. Funds in a Coverdell ESA can be used for K-12 and related expenses, as well as higher education expenses. The maximum annual Coverdell ESA contribution is limited to $2,000 per beneficiary, regardless of the number of contributors. Excess contributions are subject to an excise tax.
Entities such as corporations, partnerships and trusts, as well as individuals, can contribute to one or several ESAs. However, contributions by individual taxpayers are subject to phase-out depending on their adjusted gross income. The annual contribution starts to phase out for married couples filing jointly with modified AGI at or above $190,000 and less than $220,000, and at or above $95,000 and less than $110,000 for single individuals.
Contributions are not deductible by the donor, and distributions are not included in the beneficiary’s income as long as they are used to pay for qualified education expenses. Earnings accumulate tax-free. Contributions generally must stop when the beneficiary turns age 18, except for individuals with special needs. Parents can maximize benefits, however, by transferring the older siblings’ account balance to a younger brother, sister or first cousin, thereby extending the tax-free growth period.
U.S. Savings Bonds
If you redeem qualified U.S. Savings Bonds and pay higher education expenses during the same tax year, you may be able to exclude some of the interest from income. Qualified bonds are EE savings bonds (issued after 1989) and Series I bonds (first available in 1998). The tax advantages are minimized unless the redemption of the bonds is delayed a number of years; therefore, some planning is required.
The exclusion is available only for an individual who is at least 24 years of age before the issue date of the bond, and is the sole owner, or joint owner with a spouse. Therefore, bonds purchased by children, or bonds purchased by parents and later transferred to their children, are not eligible for the exclusion. However, bonds purchased by a parent and later used by the parent to pay a dependent child’s expenses are eligible. The exclusion is, however, phased out and eventually eliminated for high-income taxpayers.
Of course, in planning for higher-education costs, parents may also choose to use funds from an Individual Retirement Account or a traditional form of savings. Although distributions from retirement accounts may be taxable, they would not be penalized, even if the participant is under 59½ years of age, if used for qualifying education expenses. However, having a viable plan as early as possible in a child’s life will make maximum use of a family’s financial resources and may provide some tax benefit.
Source: CCH Client Letter Toolkit - 2013
There is no Spotlight for this issue.